Should You Invest In Tarsons?

Tarsons Products’ Initial Public Offering (IPO) opened on November 15. The company planned to raise fresh equity capital worth Rs 150 crore, while the existing shareholders planned to offload shares worth Rs 870 crore.

The company said that it planned to use the funds from the fresh issue to pay for capital expenditure for plant development and prepayment of existing borrowings.

The Business

Tarsons is a leading Indian life sciences company involved in the designing, manufacturing, and marketing of various components used in laboratories across India.

The products can widely be distributed in two categories — consumables and reusables. The former include pipettes, centrifuge tubes, petri dishes, cryo-vials, storage vials and others.

In contrast, reusables include items such as beakers, bottles, carboys, cylinders, and racks.

These labs include ones in academic institutes, industrial research laboratories, pharmaceutical companies and others. Some of its academic customers include the Institute of Chemical Technology and National Centre for Biological Sciences.

In the private sector, its customers include blue-chip clients such as Metropolis Healthcare, Dr Lal Pathlabs, and Dr Reddy’s Laboratories.

Presently, the company operates through five manufacturing facilities present in West Bengal. According to the company, the 36 years it has spent in the business has allowed it to establish the “Tarsons” brand as a reliable plastic lab-ware brand in India.

According to a Frost and Sullivan report, the company has a 9-12 per cent market share in the Indian lab-ware markets. Tarsons expects plastic lab-ware to replace glass-ware in the coming years. The company also expects higher growth in the segment with the rise in chronic diseases, investments in research, rising healthcare initiatives, increasing numbers of diagnostic laboratories, and other places.

The company sells its products through 141 distributors spread all over India as of 31 March 2021. The revenue generated through the company's top 10 distributors accounted for 55 per cent or more over the last three fiscals.

The southern region accounted for 39 per cent of the company’s revenues and the west contributed to 24 per cent of its revenues. The remaining revenues came in from north, central, and east India, contributing to 18, 13, and 6 per cent respectively.

As a means to diversify its base across India, the company has created a base of 45 authorised distributors overseas. As a result, the company generated 33 per cent of its revenues from overseas in fiscal 2021, up from 26 per cent in fiscals 2019 and 2020.

The Financials

The company has grown its revenues at a compounded annual growth rate of 12.6 per cent from fiscal 2019 to fiscal 2021 as the revenues grew from Rs 184 crore to Rs 234 crore in the respective years.

The company’s EBITDA (earnings before interest. taxes, depreciation and amortization) margins have remained above 40 per cent with the 2021 EBITDA crossing 46 per cent.

Again, in terms of return on capital employed (ROCE), the company’s ROCE has varied around 28 per cent to 34 per cent over the last three fiscals. The 2021 fiscal has the highest ROCE.

The company has generated positive cash flow from operations, and has reduced its debt relative to its equity over the last three fiscals.

The Valuations

The company’s valuations stand at around 51.3 times earnings at the upper part of the price band. Currently, the company has no peers listed in the space.

Key Risks

Key Raw Material Risks

For the previous three fiscals, purchase of raw materials accounted for more than 75 per cent of the import on total purchases. Any delay, interruption, or reduction in the supply of raw materials, may adversely affect the company’s business.

In addition, the company might not be able to keep up with a rapid rise in commodity prices. Raw material costs contribute to a major part of Tarsons’ costs.

Concentration Of Manufacturing Capacity

For fiscal 2021, as much as 86.32 per cent of total manufacturing revenue was generated by its manufacturing units located at Dhulagarh and Jangalpur.

In addition, the company has applied for conversion of the Jangalpur land to non-agricultural land for construction of a manufacturing facility and warehouse. However, the company is yet to receive approvals.

Regulatory Risks

Many countries including India have joined in the efforts to ban plastic products. If plastic products manufactured by the company are at the receiving end of some adverse policy in India or in any of the markets where it exports, it could have a material and adverse effect on the business.

Working Capital Cycle

A report by CARE ratings has highlighted the company’s high working capital requirements. An inability to manage the working capital properly, could potentially lead to cash flow crunches.